Wartski v. Bedford

• Decision Date: 07 November 1990
• Docket Number: Nos. 90-1119,90-1484 and 90-1485,s. 90-1119
• Citation: 926 F.2d 11
• Parties: Heinz WARTSKI, Plaintiff, Appellee, v. Terence W. BEDFORD, Defendant, Appellant. (Two Cases) Heinz WARTSKI, Plaintiff, Appellant, v. Terence W. BEDFORD, Defendant, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 11

926 F.2d 11

Heinz WARTSKI, Plaintiff, Appellee, v. Terence W. BEDFORD, Defendant, Appellant. (Two Cases)

Heinz WARTSKI, Plaintiff, Appellant, v. Terence W. BEDFORD, Defendant, Appellee.

Nos. 90-1119, 90-1484 and 90-1485.

United States Court of Appeals First Circuit.

Heard Nov. 7, 1990.

Decided Feb. 7, 1991.

Richard W. Renehan, with whom Timothy J. Dacey, Jane S. Schacter and Hill & Barlow, Boston, Mass., were on the brief, for defendant, appellant.

Edward F. Haber, with whom Michelle H. Blauner and Shapiro, Grace & Haber, Boston, Mass., were on the brief, for plaintiff, appellee.

Before SELYA, Circuit Judge, BROWN, ^* Senior Circuit Judge, and BOWNES, Senior Circuit Judge.

BOWNES, Senior Circuit Judge.

In this diversity jurisdiction case, defendant-appellant, Terence W. Bedford, appeals from a jury verdict finding him liable for breach of a fiduciary duty to plaintiff-appellee Heinz Wartski. The complaint alleged two theories of liability: breach of a fiduciary duty by Bedford as a director and officer of a close corporation (Count I); and breach of a fiduciary duty by Bedford as a partner of Wartski (Count II). The court directed a verdict for the defendant on Count I. The jury answered "yes" to the following question:

Breach of Fiduciary Duty

1. Do you find that the Plaintiff Wartski has established by a preponderance of the evidence that the Defendant Bedford, a partner in the partnership of Fleet Tech company, acquired a business opportunity of the partnership for himself in connection with the purchase of Fleet Tech, Inc.'s shares of stock and convertible debentures?

The jury awarded Wartski $261,000 in damages. We affirm.

There are three issues before us: whether the court erred in denying Bedford's motions for a directed verdict and judgment notwithstanding the verdict on Count II; whether the court's instructions to the jury were erroneous; and whether the damages awarded were erroneous as a matter of law.

I. MASSACHUSETTS LAW

An overview of Massachusetts law ¹ on business opportunity and the duty owed by one partner to another and the partnership is necessary to understand the facts and their implications. Although most of the cases involve the duty owed by one stockholder of a close corporation to the other stockholders, that duty is based upon the duty imposed upon one partner to another. In Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 328 N.E.2d 505 (1975), the court held:

Because of the fundamental resemblance of the close corporation to the partnership, the trust and confidence which are essential to this scale and manner of enterprise, and the inherent danger to minority interests in the close corporation, we hold that stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another. In our previous decisions, we have defined the standard of duty owed by partners to one another as the "utmost good faith and loyalty." Cardullo v. Landau, 329 Mass. 5, 8, 105 N.E.2d 843 (1952); DeCotis v. D'Antona, 350 Mass. 165, 168, 214 N.E.2d 21 (1966). Stockholders in close corporations must discharge their management and stockholder responsibilities in conformity with this strict good faith standard. They may not act out of avarice, expediency or self-interest in derogation of their duty of loyalty to the other stockholders and to the corporation.

Id. 328 N.E.2d at 515 (footnotes omitted). The court then went on to quote Cardozo's famous definition of the duty of partners and participants in a joint venture: "Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior." Id. at 516, quoting Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546 (1928). In Energy Resources Corp. Inc. v. Porter, 14 Mass.App. 296, 438 N.E.2d 391 (1982), the court held that an officer of a close corporation has a fiduciary duty not to divert a corporate opportunity for his own benefit. Id. 438 N.E.2d at 393. The defense in Energy Resources was "refusal to deal." The court held: "We conclude that before a person invokes refusal to deal as a reason for diverting a corporate opportunity he must unambiguously disclose that refusal to the corporation to which he owes a duty, together with a fair statement of the reasons for that refusal." Id. 438 N.E.2d at 395. We dealt with the Massachusetts corporate opportunity doctrine in In re Tufts Electronics, Inc., 746 F.2d 915 (1st Cir.1984). We held that because the corporate opportunity doctrine "is a rule of disclosure" it did not apply to the sole shareholder, director and president of a corporation because such person "cannot be accused of defrauding or concealing information from himself in his role as sole corporate director." Id. at 917. As the recitation of facts will disclose, that is not the situation here.

The Massachusetts Supreme Judicial Court (SJC) seems to have moved beyond merely requiring full disclosure in freeze-out situations. In Coggins v. New England Patriots Football Club, 397 Mass. 525, 492 N.E.2d 1112 (1986), it held that "in freeze-out situations ... where a controlling stockholder and corporate director chooses to eliminate public ownership ... a judge should examine with closest scrutiny the motives and the behavior of the controlling stockholder." Id. 492 N.E.2d at 1117. In Bodio v. Ellis, 401 Mass. 1, 513 N.E.2d 684 (1987), the SJC stated: "The shareholders in a close corporation owe to each other duties of the utmost loyalty, trust and confidence." Id. 513 N.E.2d at 688-89. We end our overview with Meehan v. Shaughnessy, 404 Mass. 419, 535 N.E.2d 1255 (1989), in which the court stated:

It is well settled that partners owe each other a fiduciary duty of "the utmost good faith and loyalty." Cardullo v. Landau, 329 Mass. 5, 8, 105 N.E.2d 843 (1952). Shelley v. Smith, 271 Mass. 106, 115, 170 N.E. 826 (1930). Holmes v. Darling, 213 Mass. 303, 305, 100 N.E. 611 (1913). As a fiduciary, a partner must consider his or her partners' welfare, and refrain from acting for purely private gain.

Id. 535 N.E.2d at 1263.

We distill from these cases the principle that a partner has a fiduciary obligation to the partnership of the utmost good faith and loyalty and cannot divert a business opportunity for his own gain without first making a complete and unambiguous disclosure to the partnership. We now turn to the facts.

II. THE EVIDENCE

We have described the standard of review that governs as follows:

The yardstick by which we take the measure of a refusal to grant a directed verdict is the same as that which we apply to the denial of a judgment n.o.v. Joia v. Jo-Ja Service Corp., 817 F.2d 908, 910 (1st Cir.1987); DeMars v. Equitable Life Assur. Soc. of U.S., 610 F.2d 55, 57 (1st Cir.1979). In conducting that exercise, we may not consider the credibility of witnesses, resolve conflicts in testimony, or evaluate the weight of the evidence. Miranda v. Munoz, 770 F.2d 255, 257 (1st Cir.1985). Rather, we must examine the evidence and the inferences reasonably to be drawn therefrom in the light most favorable to the nonmovant. Fishman v. Clancy, 763 F.2d 485, 486 (1st Cir.1985); Cazzola v. Codman & Shurtleff, Inc., 751 F.2d 53, 54 (1st Cir.1984). Put another way, "[w]e take the facts as shown by the [nonmovant's] evidence and by at least such of [movant's] uncontradicted and unimpeached evidence as, under all the circumstances, the jury virtually must have believed." Karelitz v. Damson Oil Corp., 820 F.2d 529, 530 (1st Cir.1987). A judgment notwithstanding the verdict should be granted only when the evidence, viewed from this perspective, is such that reasonable persons could reach but one conclusion. Hubbard v. Faros Fisheries, Inc., 626 F.2d 196, 199 (1st Cir.1980); Harrington v. United States, 504 F.2d 1306, 1311 (1st Cir.1974).

Wagenmann v. Adams, 829 F.2d 196, 200 (1st Cir.1987).

This case had its genesis sometime in 1979 when the plaintiff, Heinz Wartski, an electronic engineer, conceived the idea of a data collector device for motor vehicles. The data collector would provide a complete analysis of the operation of a motor vehicle in terms of fuel consumption and acceleration. In January 1980, Wartski left his job and concentrated all of his time and energy on bringing his concept to life. In 1983, Wartski received a patent on his data collector.

Defendant Terence Bedford was a neighbor of Wartski's in Brookline, Massachusetts. Wartski had a casual conversation with Bedford in the spring of 1980, in which he described his device. About two weeks later, Bedford came to see Wartski and told him that he might have some interest in the data collector. Wartski knew that in order to market the collector money would have to be raised, and someone with managerial ability would be needed. Wartski had no experience in either raising money or directing a development enterprise. He therefore asked Bedford about his background. Bedford told Wartski that he was familiar with the venture capital world. The conversation concluded with Bedford's indicating that he was interested in the production of a data collector as described by Wartski, and that he would do some research to determine its viability.

Bedford's background and experience was in the investment field. He received a MBA from Harvard Business School in 1966. After a stint working for E.F. Hutton and then for the Mugar family as an investment advisor, he formed his own consulting firm in 1978. The purpose of the firm was to help companies get started and obtain financing; it also gave investment advice to individuals.

Bedford met again with Wartski at Wartski's house. Bedford told Wartski that he had looked into the situation, that his findings were favorable and that he was definitely interested in joining forces with Wartski. It was agreed in January of 1980 that Bedford would take on the responsibility for obtaining venture capital and...